One of the world’s largest economies is on track to a devastating debt default as the Unites States Congress reached an impasses over talks this weekend, failing to agree on a deal to raise the debt ceiling.
By August 2nd, the U.S. government will have exhausted its reserves and will no longer be able to borrow on the debt markets unless U.S. policy makers reach a deal by then.
Republicans and Democrats need to stop squabbling over their views on how to deal with the debt and the debt ceiling.
President Barack Obama and congressional leaders have tried to reassure global markets that the country will be able to service its debt and meet other obligations after that deadline but investors are beginning to get nervous and are protecting themselves against the possibility of a first-ever default.
Democratic Senator Harry Reid aims to raise the debt ceiling in one shot by $2.7 trillion whereas John Boehner, current Speaker of the United States House of Representatives and a member of the Republican Party, proposed a plan to raise the debt limit in stages.
U.S. lawmakers realize how this could push the world’s largest economy back into recession and send shockwaves through global markets and have now set a Monday deadline in hopes of calming the markets and prevent s USD panic sell off. If markets fear the U.S. will lose its top notch triple-A credit rating as warned by ratings agencies recently, they will dump the U.S. dollar and Treasury bonds.
It is not clear whether either plan would satisfy ratings agencies, which warn that the United States must take significant steps to get its long-term fiscal problems under control in order to preserve its top-notch status. A downgrade would raise costs for the government American consumers, whose spending helps drive U.S. economic growth.
Robert Tipp, chief investment strategist at Prudential Fixed Income, said he thought the most likely scenario is a small deal that averts default but bumps the United States down to AA status. “I think that’s what the agencies have signaled, and therefore that’s what the markets are expecting,” he said.